China’s Indigenous Innovation and Government Procurement

16 September 2010

China has promoted indigenous innovation through an array of plans and measures in recent years. However, the moves, and particularly the newly launched national indigenous product accreditation system, have caused widespread concern about trade protectionism among foreign firms.

While China has experienced dramatic economic development since it put the ‘reform and opening-up' policy into place three decades ago, the government has gradually become aware of a serious problem that is preventing the country from realising its full potential: China's economy and production capacity rely heavily on imported foreign technologies. Foreign-owned patents underpin much of China's economic growth and foreign brands dominate in the Chinese market place. Increasingly concerned about domestic enterprises being restricted by foreign core technologies, the government wants to base the country's development on Chinese-owned intellectual property rights (IPRs).

China sees ‘indigenous innovation' as the key to reducing its reliance on low-tech manufacturing exports and moving up the value-added chain. The government developed the concept in order to boost the creation and commercialisation of home-grown proprietary ideas and technologies. Since the beginning of 21st century, ‘indigenous innovation' has been a core component of China's economic development policy - aimed at transforming the economic growth model from relying on natural and labour resources to one driven by technological innovation.

Implementation of the Policy

In 2005, China's State Council released the Medium- and Long-term National Plan for Science and Technology Development (2006-20), which formally introduced the policy of ‘indigenous innovation' or ‘self-innovation' into China's national strategy. Since then, several government agencies - including the State Council Leading Group on Science, Technology and Education led by Premier Wen Jiabao, the National Development and Reform Commission (NDRC), as well as the ministries of science and technology finance, information industry and others - have been working together to develop concrete measures to implement the policy.

At the end of 2006, the science and finance ministries jointly with NDRC issued a document entitled Trial Measures for the Administration of the Accreditation of National Indigenous Innovation Products, which defines the products that are eligible for the status of indigenous innovation products. Over the past several years, a number of local governments have developed their own catalogues of accredited indigenous innovation products.

Based on this groundwork, the three institutions released a Circular Regarding the Launch of a National Indigenous Innovation Product Accreditation System (Circular 618) on 15 November, 2009. An attachment to the circular details the principles, scope, conditions, procedures and documentation requirements for indigenous innovation product accreditation. The government currently aims to accredit products in six areas, including computers and application equipment, telecommunications products, modern office equipment, software, new energy equipment and highly efficient energy-saving products.

Objectives of the Accreditation System

The establishment of a national indigenous innovation product accreditation system plays a vital role in encouraging indigenous innovation and building an innovative country. The product accreditation process is meant to fulfil two main functions: the first is to provide institutional guidelines for making the process more open, fair and transparent; and the second is to generate a ‘national catalogue' of indigenous innovation products for government procurement. Governments at the central, provincial and local levels will use this catalogue to guide their public procurement decisions.

A product applying for accreditation should make a significance contribution to economic and social development, as well as reflect China's indigenous innovation capabilities. Central to this notion is that the product must be ‘proprietary', meaning that in order to obtain the status of indigenous innovation product, the intellectual property rights of a patented product must be fully owned by a Chinese entity. In the case of trademarked products, the original trademark must first be registered within China. (The government is currently considering some modifications to these requirements, see opposite page, ed.)

The accredited products may enjoy preferential treatment particularly in government procurement, industrial policy, and the tendering and bidding process. Although the bidding process for government contracts allows competition, these advantages provide an edge to certified products.

Concerns of Trading Partners

The most explicit benefit conferred upon products that receive indigenous innovation status is a preference in government procurement. The gigantic size of China's public purchases (valued at US$88 billion in 2008) presents substantial commercial opportunities across a wide range of industry sectors.

However, given the requirements above, it is unlikely that the majority of products developed by foreign investment enterprises operating in China will be accredited as indigenous innovation products. Consequently, the primary concern of foreign firms is that they may be excluded from the government procurement market because they develop IPRs and own trademarks outside of China. Some foreign companies have already reported difficulties in selling their products to government-related entities and attribute this to China's indigenous innovation policy and the accreditation system. For instance, businesses in the United States have argued that China's policy targets the most innovative US manufacturing and services industries, and poses an immediate threat to market access for their competitive products.

Another concern is that the accreditation system may force foreign firms to transfer their IPRs to Chinese enterprises in order to be granted market access in government procurement. Concerned about intellectual property protection in China, some companies are unwilling to make such transfers.

With these concerns in mind, foreign industry associations and governments have taken measures to exert pressure on China to drop the accreditation system. For instance, in December 2009, the US-China Business Council and 33 other trade associations from Canada, Europe, Japan, South Korea and the US sent a formal letter of complaint to the ministers of science and finance and the head of NDRC, requesting China to delay the implementation of Circular 618. The EU Chamber of Commerce in China also has expressed concern over the lack of transparency in the drafting process of the accreditation system. The US, EU and Japanese governments have communicated their concerns as well.

WTO Compatibility

From the outset, foreign firms and governments labelled the indigenous innovation policy as a protectionist measure not in line with China's WTO commitments.

In order to understand whether the accreditation system runs counter to China's WTO obligations, the first step is to clarify what the relevant commitments are. Only after this is done, can we determine whether the measure at issue breaches those commitments. Since the accredited products do enjoy favourable treatment in the government procurement market, we need to be clear about what obligations China has undertaken in this regard.

The most important WTO obligations on public procurement are contained in the Agreement on Government Procurement (GPA). The GPA is one of four plurilateral treaties within the WTO framework, and only applies to the 41 countries that have signed on to it. Although China committed to joining the agreement ‘as soon as possible' upon its accession to the WTO in 2001, its GPA accession negotiations are still ongoing. And since China is not (yet) a member of the agreement, its government procurement policies are not subject to GPA disciplines. In other words, China' government entities are entitled to grant more favourable treatment to indigenous innovation products.

Some have also argued that the indigenous innovation accreditation system may potentially conflict with China's other market access commitments, but this argument seems unconvincing as well. All enterprises in China can apply for accreditation of their products. Eligibility is not based on the enterprise's ownership, but on whether the company carries out innovative activities and produces goods that have indigenous IPRs in China. All eligible products can be accredited, and all types of enterprises are treated equally. The rationale behind this policy is to encourage all enterprises to take on innovative activities in China, to increase their investment in research and development, and to create indigenous IPRs.

Many other countries have adopted government procurement policies that require a certain amount of local content, including ‘Buy America' clauses in the US stimulus package. Japan used a similar innovation policy to boost its technological development. Circular 618 was carefully drafted to abide by and comply with relevant WTO rules. It is thus unlikely that the requirement of unique local IP ownership will be retracted.

Building a Stronger China

It is widely recognised that government support is absolutely indispensable to industry's ability to innovate, and the wave of co-ordinated procurement regulations demonstrates China's determination to pursue industrial adjustment and innovation policies in the field of science and technology.

China is not alone in this regard. Many countries, including a number of WTO Members, foster innovation through government procurement. This makes sense given the public nature and policy-oriented role of such purchases. In fact, the high level of support for the promotion of indigenous innovation indicates that China has started to apply the essential public policy function of government procurement. This is different from the role previously played by government purchases, which aimed at lowering prices and saving money in China.

In the short term, the implementation of Circular 618 may have some negative impacts on China's technology trade. In the long run, however, the accreditation system provides the country's high-tech enterprises with the support and protection they need when their technology capacity is in its infancy. This is an important measure in achieving the goal of establishing an ‘innovation society' by the year 2020 and further boosting China's competitiveness and maintaining its sustainable development.

The current global economic downturn puts every measure adopted by the Chinese government in a spotlight of attention. Notwithstanding the criticism and pressure from foreign governments and industries, it is safe to predict that China will not give up its indigenous innovation strategy and accreditation system. However, since the indigenous innovation policy and accreditation system encompass such intertwined issues as IP protection, government procurement and WTO obligations, China needs to exert more caution in striking a balance between indigenous innovation and an open economy.

Jingxia Shi is a professor at China University of International Business and Economics (UIBE) with expertise in international economic law.

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